[AVIS D’EXPERT] Real estate is often presented as an attractive investment in times of high inflation. But the reality is more nuanced. Decryption by our expert Bassel Abedi, founder of Horiz.io (ex-Rendementlocatif.com).
The rise in prices for several months, linked in particular to the rise in energy and raw material prices, is accentuated by the war in Ukraine. This inflation may worry some investors looking to protect their money. So how do you secure your money and assets? Can rental investment be a solution? Let’s take stock.
What is the origin of inflation?
Inflation is defined by an overall increase in prices, the main consequence of which is the loss of currency value and therefore of purchasing power. So you have to spend more to get the same thing. Inflation is often multifactorial, with causes such as the imbalance between supply and demand (and therefore what is rare becomes expensive) or even the increase in the price of raw materials, such as energy and therefore of the goods and services that it generates. they depend.
In February, the OECD (Organization for Economic Cooperation and Development) measured an average inflation of 7.7% over one year in its member countries, unheard of since 1990 (5.5% without food and without energy). In the United States, inflation even hit 8.5% in a year in March, a record since … 1981.
This sharp rise in prices is mainly linked to the recovery in household consumption and economic activities linked to the end of the Covid crisis as well as to the gigantic recovery or crisis support plans, which have caused a huge influx of liquidity into the economy. Demand then increased rapidly, with supply not always up to par and therefore difficult to satisfy, at a time when supply chains have been disrupted by the pandemic. We have therefore been able to notice a significant jump in the prices of many raw materials such as wood, steel, but also and above all energy (oil, gas). It is likely to increase in the months to come with the war in Ukraine.
Investing in real estate: the solution to inflation?
To protect ourselves from this inflation, we can ask ourselves if investing in real estate could be the solution. In fact, land has always been one of investors’ favorite non-financial assets. Less exposed to the economic situation, real estate remains a reliable investment that normally loses very little value and especially in the long term, even in the event of a crisis. But this idea must be qualified in some way. Indeed, with the end of the Covid crisis on the one hand, and the war in Ukraine on the other, the hypothesis of a decline in property prices could be possible, even if it is too early to say and predict it.
With regard to rental income, it tends to be thought that rents have not decreased, or even increased, especially in urban and peri-urban areas, and that rental investment remains a reliable solution to guarantee a monthly income. And investing in rental properties means being able to generate rents thanks to your property. In the long run, as rents evolve as a function of inflation, it would be entirely possible to imagine their increase, which could then benefit investors.
In fact, in relation to a bare or furnished residential lease, the indexation of the rents (excluding charges) is calculated by the reference rents index (IRL). Therefore, a landlord has the right to increase his tenant’s rent once a year. The calculation of this rent increase is based on the IRL established quarterly by INSEE.
But an economic crisis can also weaken tenants, and therefore their ability to honor rents or even their ability to apply for a lease. And this, while the investor must continue to pay the monthly loan installments and bear the often high real estate taxes in France (on property income, property tax, etc.). Therefore, the pros and cons must be weighed before investing in rental properties in a period of inflation. There is also to think that a possible resale could wait. Indeed, in the short term, property prices could experience a one-off drop. It would therefore be unwise to resell at a time when inflation is at its peak and one would have to wait for an economic recovery to consider reselling one’s property. This too must therefore be taken into consideration.
What about credit rates?
High inflation accompanied by a rise in credit rates would cause severe price pressure. Borrowing to buy a property that could appreciate makes sense when the fixed loan rate is low and house prices rise over a long period. If the rise in mortgage rates is sudden, the rise in income is slow and gradual. In the short term, this could be detrimental to investors, resulting in a very significant loss of real estate purchasing power. And even an increase in income would not compensate for this increase in credit rates.
It would therefore be advisable to invest in properties with fixed-rate credit (either directly in full ownership, or by purchasing shares of real estate supports held in civil companies (SCI, SCPI, etc.), or by resorting to solutions with tax advantages).
In an inflationary period, real estate can be a safe and protective asset thanks to the indexation of rents to the price index. But the evolution of prices also responds to the sometimes uncertain law of supply and demand. Finally, it would also be necessary to consider framework mechanisms which could be strengthened and limit rental profitability.